China’s economy is struggling, but it is not as severe as Japan’s 1990s collapse.

China's economy is struggling, but it is not as severe as Japan's 1990s collapse.

China’s Economy: A Different Path than Japan’s Troubles

China’s Economy

China’s economy has hit some hurdles lately, drawing comparisons to Japan’s economic troubles in the 1990s. However, experts argue that there are significant differences between the two situations. While Beijing hasn’t been able to achieve the post-pandemic rebound many anticipated, it’s important to note that China’s economy is not yet at the level of crisis that Japan faced 30 years ago.

Beijing’s current challenges include a faltering property market, deflation, and unfavorable demographics. The deflationary trend became evident when China’s National Bureau of Statistics reported a 0.3% annual drop in the consumer price index in July. This has fueled comparisons with Japan in the early 1990s. Recent data has even prompted Beijing to discourage negative portrayals of the economy or discussions about deflation.

However, experts argue that Japan’s economy faced a more severe combination of weak growth, declining asset prices, and housing troubles compared to China’s current scenario. Japan’s stock markets have only recently returned to the levels seen in 1990, with the Nikkei 225 breaching the 30,000 mark in May this year for the first time in over three decades.

According to David Dollar, a senior fellow and China expert at the Brookings Institute, China does indeed have serious economic issues, but they are not yet as dire as what Japan experienced. While there are similarities between the existence of asset bubbles in China and the scale of Japan’s bubble, Dollar believes that the comparison is not entirely justified.

JPMorgan strategists warn that China needs to stabilize its real estate market and address its aging population if it wants to avoid repeating Japan’s fate. In recent months, some cities have seen a decline in secondary home prices, even after a tentative recovery in the first quarter of this year. Furthermore, in 2019, China had 12.6% of its population aged 65 or older, similar to Japan’s 12.7% in 1991.

However, it is essential to acknowledge that China has certain advantages that Japan did not have during its economic crisis. China has a comparatively lower urbanization rate, which implies the potential for a productivity boom and greater housing demand. Additionally, China produces more STEM graduates, has a larger domestic market, and possesses a more robust manufacturing sector than Japan did in the 1990s.

An important distinction between China’s situation and Japan’s is the valuation of the property sector. JPMorgan strategists and Dollar from Brookings Institute agree that China’s property sector is not nearly as overvalued as Japan’s was before its economic bubble burst. Dollar highlights that Tokyo used to be worth more than the whole United States, and real estate prices in Japan fell by about two-thirds, with the stock market never fully recovering to its 1989 levels. In contrast, experts believe that China does not exhibit the same level of real estate or stock bubble.

In conclusion, while China’s stumbling economy has drawn comparisons to Japan’s troubles in the 1990s, it is crucial to recognize the key differences between the two situations. China’s challenges are serious, but they are not yet as dire as what Japan faced. China has various advantages, such as a lower urbanization rate and a more favorable demographic profile, which could help steer the economy in a positive direction. Additionally, China’s property sector is not as overvalued as Japan’s was before its bubble burst. Although caution is necessary, it is premature to equate China’s current economic scenario to the severity of Japan’s crisis three decades ago.